After filing ANDA in the US in 2003, the company has come a long way as current ANDA filings are at 429. The US revenue run rate has grown from ~US$100 million in 2009 to crossing $1 billion sales as on 2017. Note that this was despite the USFDA embargo in FY12-13 on unit VI and unit III. In rupee term, US sales have grown at 42% CAGR to Rs 6827 crore in FY12- 17. US formulations now constitute 45% of total turnover, up from 26% in FY12. US traction has also boosted investor’s confidence, which was affected by warning letters, piling debts besides non-business political adversaries. We expect US sales to grow at 7% CAGR on a higher base to Rs 7748 crore in FY17-19E.

Transformation, capacity optimisation to improve margins, cash flows

The API: formulations ratio has improved from 43:57 in FY12 to 21:79 in FY17. Another USP of the company is its vertically integrated model with huge capacity, unmatched by most peers. The company owns 22 manufacturing facilities, including eight key formulations facilities in India and abroad. These can be optimised by 1) continuous US filings and launches, 2) incremental launches and filings in the RoW markets and 3) site transfers and supplies for products covered under the Actavis deal. Higher capacity utilisation is likely to improve operating leverage thereby maintaining the margin improvement trend.

Debt no more a fear factor

The company’s debts kept on piling over the last few years as the capacity built up was in full flow and rupee depreciation. Working capital loans are now 85% of overall debts from 65-70% earlier. However, with consistent and incremental US cash flows the situation improved markedly. While D/E ratio improved from 1.9x to 0.3x, the debt/EBITDA improved from 4.5x to 0.9x in FY09-17. As the capex cycle moderates by FY18, the company expects to utilise maximum FCF for debt repayment.

The Q4 numbers once again highlighted imminent pricing pressure in the US oral solid business. The scenario is unlikely to change in the near future. However, unlike other peers, the management seems relatively undeterred regarding US prospects. Moreover, we expect the percentage of injectables, which are relatively insulated from pricing pressure, in the US portfolio, to grow from 14% in FY17 to 20-25% by FY19. We believe launches continuum, especially in the injectable space, can effectively neutralise channel consolidation and pricing pressure headwinds. Other important segment i.e. Europe is likely to fetch better margins on the back of product transfers to India and a focused approach. We have ascribed a target price of Rs 750, based on 18x FY19E EPS of Rs 41.8.

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